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Goodbye to "Super" Peso?

In recent years, the Mexican peso held up as one of the strongest currencies in emerging markets, experiencing an appreciation that surprised both economic analysts and investors. However, recent events have raised doubts about the sustainability of its resilience.

Mexican bills
Why has the Mexican Peso been so Strong? and Why it Might Start Weakening?

The notable appreciation of the Mexican peso in recent years is the result of internal macroeconomic stability and global dynamics that have favored it. Compared to other emerging economies, Mexico has shown lower fiscal vulnerabilities, a manageable current account deficit and strong finances thanks to healthy flows of foreign direct investment.

Why has the Mexican Peso performed so well? External factors that propelled it.

The conflict in Ukraine had an indirect impact on the strength of the Mexican peso. The crisis caused many international investors to withdraw their investments from the Russian Rouble and from currencies of countries with close ties to Russia, such as the Chinese yuan and the Indian rupee. As a result, Mexico benefited from the reallocation of these funds as investors sought new options.

Furthermore, Mexican monetary policy established at 11% the interest rate, which made investing in Mexico especially attractive, offering better returns than other assets considered safe, such as US Treasury bonds.

Thus, the Mexican peso went from trading at $22.38 pesos per dollar, on average, in March 2020, to $16.79 pesos per dollar, on average, in March 2024. A revaluation of over 33% in the last 4 years.

Graph of the US dollar's price in mMexican pesos
Price of the US dollar in Mexican pesos from 2020 to 2024. Source: El País

Why the Mexican Peso Began to Weaken?

The outlook changed drastically as geopolitical tensions and a new wave of global economic uncertainty intensified. This abrupt weakening of the Mexican peso, described by some as a "flash crash", was mainly due to the intensification of the conflict in the Middle East, specifically after Israel’s attack on Iran.

The rebound in the dollar and the persistence of inflation in the United States also played an important role in the depreciation of the Mexican peso. As the dollar strengthens, emerging market’s currencies typically face pressure as investors tend to seek refuge in assets considered safer. Finally, the rising inflation in the United States may anticipate a more restrictive monetary policy by the Federal Reserve, which usually benefits the dollar.

This dynamic underlines the sensitivity of the Mexican peso to geopolitical events and  external economic situations. A scenario that leads us to ask ourselves the inevitable question: Goodbye to "super" peso?

At the domestic level, even if The Bank of Mexico (Banxico) forecasts declining inflation and a moderate GDP growth for 2024, these local positive macroeconomic factors are overshadowed by global uncertainty. Although inflation has begun to decline from its historical peak of 8.7% at the end of 2022, and is expected to reach 4.02% in 2024, the external volatility imposes additional pressures on the Mexican peso and its purchasing power.

Graph of the Inflation Rate in Mexico from 1996 to 2024
Mexico's Inflation Rate from 1996 to February 2024. Source: Banco Nacional de Obras y Servicios Públicos, S.N.C.

Looking ahead, analysts forecast that the exchange rate could close the year around 18.30 pesos per dollar, which would imply a significant depreciation from 2023’s closing levels. This adjustment in the projection reflects not only the concerns but also the expectation that political and economic uncertainty continue, especially in an election year, both in Mexico and in the United States.

How to Keep your Purchasing Power

The Mexican currency has proven to be resilient, but also vulnerable to external “shocks''. In an interconnected global economy, it is essential to adopt a long term investment strategy that not only seeks profitability, but also the protection of value.

Against this backdrop, investment diversification becomes a key strategy to protect savings. Investing in safe haven assets such as gold may be a prudent decision, since historically, this type of asset has kept and even increased its value when currencies lose strength.

Protect your Savings

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